The document provides information about purchasing systems and processes. It defines a purchasing system, describes key functions and types of purchasing methods. These include tender systems, blanket orders, e-purchasing, subcontracting, rate contracts, petty cash systems, imports and more. It also outlines the advantages and disadvantages of various methods. The document gives details on concepts like tenders, blanket orders, subcontracting, capital equipment purchase and imports. It provides best practices for maintaining accountability, authorization, separation of duties, security of assets, review and reconciliation in purchasing. Finally, it outlines an audit plan to ensure purchasing policies and procedures are followed.

2. WHAT IS A PURCHASING SYSYTEM?
• A method used by businesses to buy products and/or services. A purchasing system
manages the entire acquisition process, from requisition, to purchase order, to product
receipt, to payment. Purchasing systems are a key component of effective inventory
management in that they monitor existing stock and help companies determine what to buy,
how much to buy and when to buy it.
FUNCTIONS OF PURCHASE DEPARTMENT
• Purchase materials at lowest possible cost while maintaining quality. Maintain good
relationship with the suppliers. Take advantage of economies of scale. Maintain records
efficiently. Develop highly competent personnel. Co-ordinate with all the departments of the
organization.
TYPES OF PURCHASING SYSTEM
• Tender System Stockless Purchase System
• Blanket Order E-Purchasing
• E-Procurement Subcontracting Rate Contract
• Method Petty Cash System
• Capital Equipment Purchase
• Imports

3. WHAT IS TENDER?
• In this system the entity invites suppliers to give their quotations. The supplier
with the lowest quotation wins the contract. It is a kind of contract mostly
followed by large organizations and governments when purchases are of large
value.
TYPES OF TENDER
• Open Tender.
• Restricted Tender
• Negotiated Tender
ADVANTAGES & DISADVANTAGES
• Advantages: Competitive Lower Cost Transparent Process
• Disadvantages: Low Price usually Detriment of Quality Time consuming

4. WHAT IS BLANKET ORDER?
• Company purchase many small items on day to day basis. It becomes difficult to
have inventory for all. It is most popular method for purchasing items which are
used regularly. There are two methods: Agreement is made to supply a Fixed
Quantity of the product at a Fixed Price for a Specific Period. Agreement is made
to supply for a Specific Period but the Quantity is unknown.
ADVANTAGES & DISADVANTAGES
• ADVANTAGES: Flexible Avoid negotiation Avoid placement of new order again and
again Advantage to supplier to plan the work at his place Reduces clerical activities
Protections against higher pricing in future
• DISADVANTAGES Petty frauds It requires flexible internal control Poor vendor
performances Difficult to determine and forecast the quantity

5. WHAT IS SUBCONTRACTING?
• Subcontracting refers to the process of entering a contractual agreement with an
outside person or company to perform a certain amount of work. The outside
person or company in this arrangement is known as a subcontractor. Many small
businesses hire subcontractors to assist with a wide variety of functions. Example:
A small business may use an outside firm to prepare its payroll.
SUBCONTRACTING IS ALSO KNOWN AS OUTSOURCING
• Outsource means to send part of a company’s work to outside providers to
simplify or reduce cost.
ADVANTAGES & DISADVANTAGES
• Advantages: Cost Saving Increased Efficiency Continuity & Risk Management
• Disadvantages: Loss of Managerial Control Quality Problems Hidden Costs

6. WHAT IS CAPITAL PURCAHSE EQUIPMENT?
• It is a purchasing system which requires high capital. It is used to purchase large value
assets such as Machinery and Equipment's.
ADVANTAGES & DISADVANTAGES
• Advantages: Flexible One Time Investment Increased Co-ordination & Communication
• Disadvantages: Requires lots of capital Decision making is difficult
WHAT IS PETTY CASH SYSTEM?
• A small fund of cash is kept in hand for purchases or reimbursements which are too
small to be worth submitting to the more rigorous purchase and reimbursement
procedures of a company or institution. Petty cash funds must be safeguarded and
documented to ensure that thefts do not occur. The most common way of accounting
for petty cash expenditures is to use the impress system.
ADVANTAGES & DISADVANTAGES
• Advantages: Easy Time saving
• Disadvantages: Embezzlement of Funds Cuts down on accountability Accounting Errors
Lot of Paper Work

7. WHAT ARE IMPORTS?
• It is a method to purchase the goods from the area or the country outside the
India Territory. Imports are not easy and are governed by the Central Government.
PROCEDURE OBTAINING IMPORT LICENSE
• Obtaining Foreign Exchange Placing an order Receipt of Shipment Advice
Appointing C & F Agents Dispatching letter of credit Receipt of Documents Bill of
Entry Delivery of Goods
ADVANTAGES & DISADVANTAGES
• Advantages: Stabilize seasonal market fluctuations Maintain cost competitiveness
in your domestic market Enhance potential for expansion of your business Higher
quality More variety Cheaper goods
• Disadvantages: High Tax Increased Transportation Cost Foreign exchange risk

8. E-PURCHASING / E- PROCUREMENT
• procurement is the business-to-business or business-to- consumer or business-to-
government purchase and sale of supplies, work, and services through the Internet. E-
procurement helps to achieve benefits such as increased efficiency and cost reduction.
ADVANTAGES & DISADVANTAGES
• ADVANTAGES Reducing Cost Visibility of spend Productivity Control Quicker processing times
Better communication
• DISADVANTAGES High Learning curve Human or system errors in orders No hardcopies
Training costs System failure
WHAT IS ORDER ON TELEPHONE?
• It is a method used to place orders of small value. In this method the purchase department
does not prepare a formal purchase order. The order is placed by telephone. The price is
discussed an finalized on the telephone. This works well with the captive type of vendors
WHAT IS RATE CONTRACT METHOD?
• A Rate Contract or a Rate Agreement (RC in short) is a procurement cost reduction strategy
aimed at standardizing procurement prices for commonly procured, homogenous and price
varying inputs. The basic idea behind a rate contract is to aid a company in establishing
parameters for the purchase of goods and services necessary for the continued operation of
the business.

9. WHAT IS STOCKLESS PURCHASING?
• Stockless purchase system can be defined as Arrangement in which a supplier
holds the items ordered by the customer in its own warehouse, and releases them
as and when required by the customer. It is also known as just-in-time purchasing.
In this system the vendor has a clear idea of the requirements of the buyer and
holds the stock in convenient location. The seller has the financial responsibility of
holding the stock.
EXAMPLES
• Tyre warehouse near automobile manufacturing units. Petrol pumps in transport
undertaking. Aviation fuel pumps at airport.
ADVANTAGES & DISADVANTAGES
• Advantages: Reduced warehouse space Eliminate the cost of storing, maintaining
and distributing supplies Increased inventory turnover Less manpower
• Disadvantages: High cost Need of complex technology

11. Separation of duties
To ensure proper separation of duties, assign related buying functions to
different people. With proper segregation, no single person has complete
control over all buying activities.
Best practice is to have different people:
• Approve purchases
• Receive ordered materials
• Approve invoices for payment
• Review and reconcile financial records
• Perform inventory counts
Potential consequences if duties are not separated:
• Unauthorized or unnecessary purchases made
• Improper charges made to department budgets
• Excessive costs incurred
• Goods purchased for personal use

12. Accountability, authorization, and approval
You maintain accountability when you authorize, review, and approve
purchases based on signed agreements, contract terms, and purchase
orders.
Best practices:
• Comply with ethical buying practices and policy.
• Review and update signature authorizations periodically.
• Obtain pre-approval of consultant agreements by Purchasing.
• Verify receipt of goods and services against contract/ purchase order and invoice
information.
• Reconcile ledgers for accuracy of recorded transactions.
• Monitor to ensure that invoices are paid in a timely manner.
Potential consequences if accountability does not exist:
• Unauthorized, unnecessary, or fraudulent purchases
• Unauthorized work performed by suppliers
• Lost supplier discounts due to late payments
• Improper charges to incorrect account/ funds resulting in a misappropriation of funds
• Conflict of interest when paying employee for unauthorized outside work

13. Security of assets
Once you have received your purchased goods, secure the materials in a safe
location. To ensure that your resources are accounted for, periodically count
your inventory and compare the results with amounts shown on control
records.
Best practices:
• Secure goods received in a restricted area.
• Restrict inventory access to appropriate staff.
• Lock goods and materials, and provide key or combination to as few people as
possible.
• Keep inventory records and periodically calculate beginning and ending inventory
amounts.
Potential consequences if your assets have not been secured:
• Theft of goods
• Inventory shortages
• Additional costs incurred for replacement of goods

14. Review and reconciliation
Practice timely review of supplier’s invoice, packing slips, and purchase
orders. Check accuracy of the information for prior payment, correct
quantity ordered, and price charged. Monthly ledger reconciliation enables
you to find improper charges and validate appropriate financial transactions.
Best practices:
• Review supplier invoices for accuracy by comparing charges to purchase orders.
• Verify that the goods and services purchased have been received.
• Perform monthly reconciliations of operating ledgers to ensure accuracy and
timeliness of expenses.
Potential consequences if review and reconciliation is not performed:
• Improper charges to your department budgets
• Disallowances resulting from costs charged to incorrect accounts/funds
• Payments made for items or services not provided

15. AUDIT PLAN ON PURCHASE

16. GENERAL:
• The primary responsibility of the Purchasing Department is to provide for the
purchase of materials, supplies, and services, with the objective that they will be
available at the proper time, in the proper place, in quantity, quality and price
consistent with the needs of the District.
• This audit will concentrate on ensuring internal controls are in place to maintain
the objectives stated above.
AUDIT OBJECTIVES:
• Comprehensive policies and procedures addressing purchasing activities have
been developed and documented;
• The District is in compliance with the established policies and regulatory
requirements;
• Validate that there is proper segregation of duties within the purchasing
department;
• Ensure that adequate internal controls have been implemented to limit exposure
to unauthorized or inappropriate transactions;
• Verify that transactions are processed in accordance with purchasing guidelines
and District policies and procedures.

17. PRELIMINARY WORK:
• Prepare an engagement memo to announce the audit.
• Prepare Auditor’s Independence Statement.
• Obtain an understanding of the auditee’s operations through research and
interviews.
• Perform a general overview of the internal control environment and establish the
scope of the audit.
• Develop appropriate audit tests to provide assurance that management’s
objectives are being met, document in audit work program.

18. AUDIT PROCEDURES & TESTINGGeneral
Obtain the following,
where applicable:
Policies and Procedures
Organizational Charts
Prior Audit Reports
External Auditor Management Reports
Regulatory Examination Reports
Related Information Regarding Laws and Regulations
Review policies and procedures to determine
adequacy. Ensure the policies and procedures have
been communicated to appropriate personnel.
Review any prior examination reports to determine whether
corrective action has been implemented for noted deficiencies

19. CompletenessTesting a.From the Purchase Order listing for the audit period, obtained from
CIMS, review the listing for numerical sequence of the PO’s and scan the
listing for any unusual amounts (i.e. frequently repeating amounts,
credit balances).
b.Ensure numerical
sequence of PO’s.
note first PO number in April2013 and
last PO number in March 2014.
inmate last PO number for August
2014 and first PO for September 2014.
c. Scan listing for gaps within the sequence of PO
numbers.
d. Run a query from CIMS of all
processed invoices for the audit period
and scan the list for those without a PO.
Select a sample of those without a
PO and verify that a PO is not
required (i.e. expense reports).

20. VendorTesting
a.Review the process for obtaining new vendors (new tax
identification #, certificates, etc)
b.Review vendor list for inactive vendors (no activity for 3 or more
years)
c.Review vendor list for active vendors under several different
vendor numbers and the same address (duplicates).
d.Compare database of employee addresses to the vendor file
addresses. Review/investigate any matches (are they reasonable, is
there a Conflict of Interest Form on file).
e.Select a judgmental sample of sole source vendors to review and
verify the documentation for determination of the vendor as a sole
source.
f. Determine how vendor performance and experiences are
measured, documented and used for future relationships.

21. PurchaseOrderTesting
a.From the total number of
purchase orders processed during
the audit period Select a
judgmental sample of purchases
for testing purposes:
under RS.10,000
RS.10,000 – RS.24,999
over RS.25,000
i.For all POs selected for testing note whether: Ensure documentation is
original and free from alteration
ii.Additionally, for purchases between RS.10,000 and RS.25,000. test
the following:
Determine whether the purchases were competitively bid or phone quotes were
obtained.
Verify that the awarding criteria, was
one of the following:
purchase price
reputation
quality of goods/ services
specialty of district needs
past relationship
HUB

22. PurchaseOrderTesting Ascertain how the vendor was selected and determine whether the selection was
reasonable and complied with policy.
Ensure that documentation is available to support the selection process.
iii. Additionally, for purchases over
$25,000. Perform testing for the
following:
Determine which method as used to secure
the selection.
competitive bid
competitive sealed bid
newspaper notification
request for proposal (RFP)
purchase catalog
inter-local contract
reverse auction procedure
Determine whether the selection appears
reasonable and is justified.
Ensure that documentation is available to
support the selection process.

23. PurchaseOrderTesting
B.Determine the total number of sealed bids obtained/processed
during the audit period. Select a judgmental sample to Bid
proposals were properly completed, with scope specifications and
special terms and conditions. Sealed bids received were properly
completed (i.e. references, felony conviction notification, conflict of
interest disclosure and dollar amount for items).Bids were properly
advertised. Bid summary sheet was complete. Bid Sign-In sheet
documenting who was present at the opening of the sealed bids
was properly filled out. Determination for selection of vendor was
documented. Vendors’ sealed bids reviewed at “opening”, were
received by the stated deadline. Board approved.
Run a query by commodity codes and select a sample of those with
a total >RS.25,000 and verify that a bid was obtained.

24. Closed/
Outstanding PO’s
a.Gain an understanding of how PO’s are closed and purged
from the system.
b.Run a query for the
audit period for all
“open” PO’s.
i.Select a judgmental
sample of PO’s to
verify the following:
Check for PO’s not
properly “closed”
“Approval” Files a.Review authorization limitations for consistency and
reasonableness.
b.Evaluate personnel authorized to approve and check for
terminations, transfers, etc.
Customer
Service
a.Determine the method and frequency in which the Purchasing Department
assesses its service delivery and measures performance (i.e., online surveys,
questionnaires). Ensure that quality and timeliness of service are evaluated.
Miscellaneous
a.Determine whether it is acceptable for buyers to never switch commodities.

25. WORK PAPERS:
• Organize all relevant work papers in a clear and logical and manner and cross
reference audit steps to their corresponding work papers.
• Create a final index for the work paper bundle.
• Compile and securely store audit CYA files for reference if needed.
AUDIT FINDINGS & REPORTING:
• Document summaries of all audit findings as soon as exceptions are noted.
• Recommend to auditee any appropriate adjustments, internal control or
operational recommendations as a result of the review.
• Determine whether to include each audit finding in final audit report based on the
audit disposition, the overall materiality to the audit and the relative risk
exposure.
• Prepare the draft audit report for review by auditee.
• Distribute tentative and preliminary audit report to auditee and request responses
within two weeks.
• Compile final audit report with auditee’s responses, review for errors, and
distribute to appropriate District management.

26. THANK YOU
By
Raghav
9962869008
raghav057@ymail.com